ghost of inflation past
To find the ghost of inflation past, all you really have to do is to look at the developing world. In contrast to developed countries, the inflation environment tends to have the following characteristics:
- GDP growth driven by putting more people to work, not productivity increases that try to do the opposite
- Economy is more manufacturing-oriented, and less service-oriented
- Oil is relatively expensive in each of the following terms: Per Capita GDP, disposable income, and number of Big Macs/liter of gas (purchasing power)
- Food is equally expensive in each of the same terms
- Manufacturing-Export or Commodity-Export driven economy
- Strong real GDP growth
- Strong wage growth
- Cost of labor cheap compared to cost of capital
- Economy is less consumer-oriented; more producer-oriented
- Currency is pegged to the dollar
These characteristics could not be more different than the inflation that we talk about in the US in 2008. Some of them might have applied in the 70s and earlier (hence ghost of inflation past), but no more.
Nevertheless, it is the US and other developed countries that are stoking inflation somewhat accidentally in the developing world by:
- Demanding obscene amounts of products that are labor-intensive
- Using vast amounts of energy per capita
- Filling up gas tanks with ethanol made with enough corn to feed a person for months
- Devaluing the dollar
The point here is that these policies are sooner or later going to turn into a kind of economic warfare, if they haven’t already.
Note: Economists will claim that inflation is strictly a monetary phenomenon. Maybe so, but the M2 money supply doesn’t put food on the table.
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